VZ: Yielding the Right of Way

by Dan January 7, 2016 2:42 pm • Commentary• Trade Ideas

On Monday’s Fast Money on CNBC you might have missed my Final Trade because my 10 year old daughter Ellie kind of stole the show:

Once you get through Ellie hamming it up you see that I touched on a theme that we have espoused for the better part of the last few months. For those looking for new U.S. equity exposure, consider sectors like Utilities, Telco and Big Pharma, all of which are deemed to be defensive given their high dividend yields, domestic revenue exposure (excluding pharma) which lessens the impact of dollar strength.

On a day like today Verizon (VZ), which was my final call on Monday, acts decently, down about 0.7% vs the S&P 500 (SPX) which is down about 2.2%.  Along the same lines, VZ’s 2% loss on the year is less than half of the SPX’s 4.6% decline.  

With VZ at $45.25 the dividend yield is about 5%, pretty fat.  If you were inclined to buy the stock here at $45.25 you might consider selling an upside call and size up that yield. For instance you could sell the April 48 call at 48 cents, a tad more than 1% of the stock price.  If you did that quarterly, it nearly matches the stock’s quarterly dividend of 56 cents (stock goes ex-div on April 6th) and create the potential for a super-yield of 9% annualized with the dividend and the call overwrite.

On Monday’s show my thought was that the stock could be bought a little above $46 using a $44 stop on the downside.  A look at the one year chart shows the near term support at the level, but also shows the massive gap on August 24th from $46 to $38:

[caption id="attachment_59978" align="aligncenter" width="600"]VZ 1yr chart from Bloomberg VZ 1yr chart from Bloomberg[/caption]

Given the current state of global markets, it makes sense to be careful about committing new capital to new equity longs until things calm down a bit overseas. At this point it makes sense to wait for a stock like VZ re-test key support, and hold and then look to to buy stock and sell call.

I would add one other point about this strategy, the dividend yield and the call sale offer some embedded protection to the downside, while the call sale limits potential upside. But the call sale will come at nicely inflated implied vol with the market weakness.

We will circle back on this idea if see a safer entry than today.